The day after the Fed raised interest rates, the Dow dropped thousands of points. What is the market panicking about? The bear market has just begun?
On May 5, local time, panic selling emerged in the U.S. stock market, with the three major stock indexes completely giving back their gains from the previous day. The Dow fell nearly 1,400 points during the session.
As of the close, the S&P 500 fell 3.56% to 4146.87 points; the Nasdaq fell 4.99% to 12317.69 points; the Dow Jones fell 3.12% to 32997.97 points. Both the Dow and Nasdaq posted their biggest one-day losses since 2020. This is also the biggest reversal in the U.S. stock market since the epidemic – the largest one-day drop in the Dow one day after the largest one-day gain since 2020.
The market view believes that investors’ concerns about the economy falling into stagflation or even recession are the main reasons for the sharp turnaround in the market.
Concerns about inflation and recession
The U.S. is suffering from the highest level of inflation in 40 years. The latest data released on May 5 showed that the initial value of non-farm productivity in the United States fell by 7.5% in the first quarter, the largest decline since 1947. Labor costs have soared as the economy shrinks, signaling an extremely tight job market.
On May 4, the Federal Reserve announced its decision to raise the federal funds rate range to a range of 0.75%-1.00%, the first significant rate hike since 2000 by 50 basis points; on June 1, it began to shrink its balance sheet at a monthly pace of $47.5 billion, three Gradually increase the cap on balance sheet reduction to US$95 billion per month within a month.
Fed Chairman Powell also hinted at a press conference that he ruled out the possibility of a follow-up rate hike of 75 basis points, which boosted market sentiment for a time.
Zhao Yaoting, global market strategist at Invesco Asia Pacific (ex Japan), pointed out that the FOMC decision and Powell’s forward rate hike guidance suggest that the Fed continues to try to achieve a soft landing while dealing with high inflation levels. For the rest of the year, the Fed will continue to target a neutral policy rate as soon as possible, in line with current market expectations. The risk is primarily a further upside in yields, with U.S. and Asia-Pacific equities likely to continue to experience some volatility given the tightening environment. Global markets have so far largely taken the tightening in stride, and U.S. bonds have so far faced more volatility.
Powell repeatedly emphasized on May 4 that the U.S. economy is still resilient, he does not believe that a recession is something that will happen automatically after monetary policy is tightened, and pointed out that the U.S. “has a good chance of achieving a soft landing.” Between controlling inflation and a recession, the Fed will still keep inflation in check as its top priority right now.
But the market doesn’t seem to believe Powell’s claims.
The Wall Street Journal pointed out that given that the U.S. inflation rate is at its highest level since the early 1980s, the market had expected the Fed to raise interest rates more aggressively, and the prospect of slower interest rate hikes set off in the second half of Wednesday afternoon. A wave of frenzied buying. But Thursday’s decline dashed those optimism. Thursday’s rout was another example of market volatility this year, underscoring jitters over the potential impact of the Federal Reserve’s move to raise interest rates.
“The U.S. Treasury yield curve is steepening, which tells you that the Fed isn’t doing enough. Long-term Treasury yields are likely to climb toward this year’s highs, trying to send a message to Powell. That’s why we still think that after every Fed meeting, the market The real move won’t start until about 18 hours after the policy announcement,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.
Ian Lyngen, head of U.S. rates strategy at Bank of Montreal (BMO) Capital Markets, believes the market’s message on May 5 was clear and loud — raising interest rates risks triggering a recession. U.S. Treasury yields soared as stocks fell, a sign that bond markets no longer believe the Federal Reserve can give the economy a “soft landing” while continuing to tighten policy to fight inflation.
“The Fed’s approach has resulted in less liquidity and higher volatility in the market, so until the Fed gets inflation under control and changes policy, this may be our new normal for a while,” said John Ingram, chief investment officer and partner at Crestwood Advisors.
Even if there are likely to be no further rate hikes in the coming months, investors still face the biggest tightening of U.S. monetary policy since 2000. The last time the Fed raised rates by half a percentage point was in 2000. While many investors say the market conditions were very different then, when market valuations were higher and the long-term business prospects of many fast-rising Internet companies were uncertain, they did not forget that the major stock indexes ended the year with sharp losses.
Many investors are now questioning how high the Fed is likely to raise interest rates over the next two years amid soaring inflation, and how that might affect the broader economy and corporate profits.
“It’s like when we’re all on medication, and the drug has to build up in the body’s system to have an effect, and there’s always a lag in the impact of the Fed raising the federal funds rate,” said Tim Horan, co-chief investment officer for fixed income at ChiltonTrust.
Separately, many investors are concerned about how far the Federal Reserve is likely to raise interest rates over the next two years amid soaring inflation, and what effect that might have on the economy and corporate profits.
Wall Street believes that the Fed is still “open” to controlling inflation by raising interest rates above neutral, meaning the Fed wants to see financial conditions continue to tighten, which will significantly hit high-valued technology and growth stocks.
Has the bear market just started?
In fact, 2022 will be the most painful year for bargain hunters in decades. Since January, the S&P 500 has averaged 2.3 days of declines, more than in any year since 1984, while returns after declines have been negative 0.2%. It was the worst in 35 years.
Wall Street bear David Wright believes that this bear market has just begun, “macroeconomic and geopolitical turmoil is worrying investors. No other country in the world will bet so much wealth on stocks. We It’s at the height of complacency, and the market is in the biggest bear market of its life right now, and the bear market has just started, and there’s a big wave to come.”
Jim Paulsen, chief investment strategist at investment research firm Leuthold Group and one of Wall Street’s most prestigious bulls, said bluntly: “I’m as scared as everyone else…I’ve been in this industry for nearly 40 years, but things have changed. It’s getting worse. Because you can’t be sure of the future, and you know you’ve been wrong in the past.”
“It’s hard to tell who’s going to be the massive buyer of the stock market in the coming weeks,” said Viraj Patel, global macro strategist at Vanda Reearc. “It’s a game of waiting for the catalysts to come… You need to get more confidence from the data. , either showing that inflation has peaked, or that the economy is slowing, and the Fed doesn’t need to be so aggressive.”
According to Greg Boutle, U.S. head of equity and derivatives strategy at BNP Paribas, the rally on May 4 was “a sign of a bear market rally.”
“Positions have been very defensive in this move, which may somewhat lessen the sense of panic or forced selling,” Boutle said. for problems.”
Mike Wilson, chief U.S. equity strategist at Morgan Stanley, also believes that the current bear market is far from over. The S&P 500 is at least down to 3,800 in the near term, and possibly as low as the 200-week moving average of 3,460 if earnings per share over the next 12 months start to decline on profit margins or recession fears.
The GAIN team turned neutral on the short-term tactical bearish bias on the S&P 500. One is that the S&P 500 hit the bottom of its recent range on April 11, and the other is that bearish sentiment has reached extreme levels. “We’re still leaning toward a short-covering rally that re-sells at the top of the index’s range near 4,600. Rising rates are even more detrimental to Nasdaq constituents.”
(Editor in charge: Zhang Ziyi)
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